Food for Thought 

On Wednesday 31st January, we're holding our annual review of the ValidPath CIP at Parmenion's offices in Bristol.  Two of us from ValidPath are attending, and three financial planners, representing three Member Firms will be there too - each year, our aim is to open up this review process as far as possible, making it a genuinely collaborative exercise.

There's always a lot of data to look at, and the analysis requires careful weighing.  Inevitably, we return, repeatedly, to similar kinds of questions:  is the strategic asset allocation model still an accurate one?  We'll look again at our eleven risk-models to see if they remain efficient in terms of the way they plot on the risk/reward curve.  This will be our seventh annual review since the CIP was launched in April 2011, and perhaps we should not be surprised (because a great deal of work underpinned the original proposition) but we have found that the asset allocation strategy is reliable and generates outcomes that are proportionate and predictable.  That doesn't mean though that we would turn a blind eye to the obvious kinds of questions that arise, and therefore, in preparation for our review meeting, I have (as I usually do) spent some time revisiting some of the technical sources that I have found helpful over the years.  For those with a yen to explore the subject in more depth, here is a quick reading list:

Access the book on Amazon by clicking on its title
Author Title
Bernstein, William The Intelligent Asset Allocator
Butler, Jason Wealth Management
Ellis, Charles D. Winning the Loser's Game
Fraser-Sampson, G Multi-Class Investment Strategy
Hale, Tim Smarter Investing
Hebner, Mark. T Index Funds
Owen, D. & Griffiths, R. Mapping the Markets
Stanyer, Peter Guide to Investment Strategy

Of course, whilst we have a coherent and well-managed CIP at ValidPath, we don't force people to use it.  An increasing proportion of our Members see the value in it, amongst the other solutions available to them.  However, one clear lesson from our own experience is that professional intermediaries need to have a firm grasp of their own asset-allocation models, having a clear understanding of how they operate in practice, and what is in and what's out.  Just as a taster, here is a quick potted guide to Jason Butler's assessment of the main asset-classes available - as it pertains to 'normal' investors:

From the above text, commencing from Chapter 6
Asset Class Commentary
Global short-dated bonds (currency-hedged) Recommended for between 50% and 100% of bond exposure.
Intermediate dated index-linked gilts Recommended for between 50% and 100% of bond exposure or for risk-averse investors who require only inflation-protection.
Conventional long-dated gilts Not recommended for risk-averse investors with long-term horizons or moderate equity allocations, but could be useful for those with significant equity exposure who feel that deflation is more likely in the future.
National Savings Certificates Recommended as proxy for cash or short-dated fixed income.
Index/LIBOR-linked high-quality corporate bonds Not recommended for risk-averse investors due to equity-type risks.
Permanent interest-bearing shares Not recommended due to capital risks.
High-yield bonds, lower credit quality bonds, convertible preference shares, convertible bonds, emerging market bonds Not recommended due to uncompensated equity-type risks.
International developed markets equities Recommended as a core return provider and diversifier.
Emerging markets equities Recommended as a return enhancer and diversifier.
Collateralised commodities futures index funds Not recommended unless investors are prepared to give up some investment return for lower risk.
Global commercial property (REITs) Recommended as a core return provider and diversifier (our CIP uses B&M funds, a very different asset class).
Gold Not recommended in a multi-asset portfolio held for the long term.
Hedge funds/funds of hedge funds Not recommended due to their complexity, high costs and unsubstantiated risk/reward characteristics.
Structured Products Not recommended for long-term investors due to high costs, additional provider risks and loss of return upside.  May be suitable for very short-term investors who accept the downsides.
Private Equity Not recommended due to high costs and poor return characteristics.
Life settlement funds Not recommended due to poor upside, lack of transparency and significant counterparty risk.
Zeros Not recommended due to equity-type risks.
Convertible bonds Not recommended due to equity-type risks.
And you need to buy the book to get the whole background to this snippet!


Kevin Moss, 26/01/2018